Business Question

‫المملكة العربية السعودية‬
‫وزارة التعليم‬
‫الجامعة السعودية اإللكترونية‬

Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University

College of Administrative and Financial Sciences

Assignment 2
Decision Making and Problem Solving (MGT 312)
Due Date: End of week 10, 2/11/2024 @ 23:59
Course Name: Decision Making and Problem Student’s Name:
Solving
Course Code: MGT312
Student’s ID Number:
Semester: 1st

CRN: 11561
Academic Year:2024-25; FIRST SEMESTER

For Instructor’s Use only
Instructor’s Name: Dr. Faisal Alhathal
Students’ Grade:
/ 10

Level of Marks: High/Middle/Low

General Instructions – PLEASE READ THEM CAREFULLY
•

The Assignment must be submitted only in WORD format via allocated folder.

•

Assignments submitted through email will not be accepted.

•

Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation.

•

Students must mention question number clearly in their answer.

•

Late submission will NOT be accepted.

•

Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No
exceptions.

•

All answered must be typed using Times New Roman (size 12, double-spaced)
font. No pictures containing text will be accepted and will be considered plagiarism).
Submissions without this cover page will NOT be accepted.

Restricted – ‫مقيد‬

Course Learning Outcomes-Covered
•

Demonstrate a solid understanding of decision making process for complex issues
pertaining to business environment both internally and externally. (1.2)

•

Explain critical thinking and cognitive psychology as it pertains to analyze and
synthesize information for problem solving and decision making. (2.7)

•

Identify and analyze different perspectives on understanding problems for
different situations. (3.1)

Assignment Instructions:
• Log in to Saudi Digital Library (SDL) via University’s website
• On first page of SDL, choose “English Databases”
• From the list find and click on EBSCO database.
• In the search bar of EBSCO find the following article:
Title:
“The Hidden Traps in Decision-Making”
Author:
John S. Hammond, Ralph L. Keeney, and Howard Raiffa
Date of Publication:
October 2023
Published:
Harvard Business Review

Assignment Questions:

(Marks 10)

Read the attached article titled as “The Hidden Traps in Decision-Making” by John S.
Hammond, Ralph L. Keeney, and Howard Raiffa, published in Harvard Business
Review, and answer the following Questions:
1. Summarize the article and explain the main issues discussed in the article. (In
600-700 words) [4 Marks]
2. What do you think about the article in relations to what you have learnt in the
course about decision making traps and improving decision making skills? Use
additional reference to support you argument. (In 300-400 words) [3 Marks]
Critical Thinking Question:
3. You can take a problem-solving approach to resolving conflicts in an
organization. Suppose you and your colleague are working together on a highprofile project to develop software for handling orders at your company. You
want to adapt existing software and your colleague wants to develop new
software. How would you apply the problem-solving steps to resolve the conflict?
(In 300-400 words) [3 Marks]

Restricted – ‫مقيد‬

48

HBR Special Issue
Fall 2023

AVOID
PSYCHOLOGICAL
TRAPS

ORIGINALLY PUBLISHED SEPTEMBER–OCTOBER 1998

The Hidden Traps
in Decision-Making
In making decisions, you may be at the mercy of your
mind’s strange workings. Here’s how to catch thinking
traps before they become judgment disasters.
→ by JOHN S. HAMMOND, RALPH L. KEENEY, and HOWARD RAIFFA

MA K I NG D E CI SI O NS is the most import-

ant job of any executive. It’s also the
toughest and the riskiest. Bad decisions
can damage a business and a career,
sometimes irreparably. So where do bad
decisions come from? In many cases,
they can be traced back to the way the
decisions were made—the alternatives
were not clearly defined, the right information was not collected, the costs and
benefits were not accurately weighed.
But sometimes the fault lies not in the
decision-making process but rather in
the mind of the decision-maker. The
way the human brain works can sabotage our decisions.

Illustration by AMANDA BERGLUND

Researchers have been studying the
way our minds function in making decisions for half a century. This research,
in the laboratory and in the field, has
revealed that we use unconscious routines to cope with the complexity inherent in most decisions. These routines,
known as heuristics, serve us well in
most situations. In judging distance, for
example, our minds frequently rely on a
heuristic that equates clarity with proximity. The clearer an object appears, the
closer we judge it to be. The fuzzier it
appears, the farther away we assume it
must be. This simple mental shortcut
helps us to make the continuous stream

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Fall 2023

49

AVOID PSYCHOLOGICAL TRAPS
THE HIDDEN TRAPS IN DECISION-MAKING

of distance judgments required to navigate the world.
Yet, like most heuristics, it is not
foolproof. On days that are hazier than
normal, our eyes will tend to trick our
minds into thinking that things are
more distant than they actually are. Because the resulting distortion poses few
dangers for most of us, we can safely
ignore it. For airline pilots, though, the
distortion can be catastrophic. That’s
why pilots are trained to use objective
measures of distance in addition to
their vision.
Researchers have identified a whole
series of such flaws in the way we think
in making decisions. Some, like the
heuristic for clarity, are sensory misperceptions. Others take the form of biases.
Others appear simply as irrational
anomalies in our thinking. What makes
all these traps so dangerous is their
invisibility. Because they are hardwired
into our thinking process, we fail to
recognize them—even as we fall right
into them.
For executives, whose success hinges
on the many day-to-day decisions
they make or approve, the psychological traps are especially dangerous.
They can undermine everything from
new-product development to acquisition and divestiture strategy to succession planning. While no one can rid his
or her mind of these ingrained flaws,
anyone can follow the lead of airline
pilots and learn to understand the traps
and compensate for them.
In this article, we examine a number
of well-documented psychological traps
that are particularly likely to undermine
business decisions. In addition to reviewing the causes and manifestations

50

HBR Special Issue
Fall 2023

of these traps, we offer some specific
ways managers can guard against
them. It’s important to remember,
though, that the best defense is always
awareness. Executives who attempt to
familiarize themselves with these traps
and the diverse forms they take will be
better able to ensure that the decisions
they make are sound and that the recommendations proposed by subordinates or associates are reliable.

The Anchoring Trap
How would you answer these two
questions?
Is the population of Turkey greater
than 35 million?
What’s your best estimate of Turkey’s
population?
If you’re like most people, the figure
of 35 million cited in the first question
(a figure we chose arbitrarily) influenced your answer to the second question. Over the years, we’ve posed those
questions to many groups of people.
In half the cases, we used 35 million
in the first question; in the other half,
we used 100 million. Without fail, the
answers to the second question increase
by many millions when the larger
figure is used in the first question. This
simple test illustrates the common and
often pernicious mental phenomenon
known as anchoring. When considering
a decision, the mind gives disproportionate weight to the first information it
receives. Initial impressions, estimates,
or data anchor subsequent thoughts
and judgments.
Anchors take many guises. They can
be as simple and seemingly innocuous
as a comment offered by a colleague

or a statistic appearing in the morning
newspaper. They can be as insidious as
a stereotype about a person’s skin color,
accent, or dress. In business, one of the
most common types of anchors is a past
event or trend. A marketer attempting
to project the sales of a product for the
coming year often begins by looking at
the sales volumes for past years. The old
numbers become anchors, which the
forecaster then adjusts based on other
factors. This approach, while it may
lead to a reasonably accurate estimate,
tends to give too much weight to past
events and not enough weight to other
factors. In situations characterized
by rapid changes in the marketplace,
historical anchors can lead to poor forecasts and, in turn, misguided choices.
Because anchors can establish the
terms on which a decision will be made,
they are often used as a bargaining
tactic by savvy negotiators. Consider
the experience of a large consulting
firm that was searching for new office
space in San Francisco. Working with
a commercial real-estate broker, the
firm’s partners identified a building that
met all their criteria, and they set up a
meeting with the building’s owners. The
owners opened the meeting by laying
out the terms of a proposed contract:
a 10-year lease; an initial monthly price
of $2.50 per square foot; annual price
increases at the prevailing inflation
rate; all interior improvements to be
the tenant’s responsibility; an option
for the tenant to extend the lease for
10 additional years under the same
terms. Although the price was at the
high end of current market rates, the
consultants made a relatively modest
counteroffer. They proposed an initial

Psychological traps can undermine everything
from new-product development to acquisition and divestiture
strategy to succession planning.

price in the midrange of market rates
and asked the owners to share in the
renovation expenses, but they accepted
all the other terms. The consultants
could have been much more aggressive
and creative in their counterproposal—
reducing the initial price to the low end
of market rates, adjusting rates biennially rather than annually, putting a
cap on the increases, defining different
terms for extending the lease, and so
forth—but their thinking was guided
by the owners’ initial proposal. The
consultants had fallen into the anchoring trap, and as a result, they ended up
paying a lot more for the space than
they had to.
What can you do about it? The
effect of anchors in decision-making
has been documented in thousands of
experiments. Anchors influence the
decisions not only of managers, but also
of accountants and engineers, bankers
and lawyers, consultants and stock
analysts. No one can avoid their influence; they’re just too widespread. But
managers who are aware of the dangers
of anchors can reduce their impact by
using the following techniques:
• Always view a problem from different perspectives. Try using alternative
starting points and approaches rather
than sticking with the first line of
thought that occurs to you.
• Think about the problem on your
own before consulting others to avoid
becoming anchored by their ideas.
• Be open-minded. Seek information
and opinions from a variety of people
to widen your frame of reference and to
push your mind in fresh directions.
• Be careful to avoid anchoring your
advisers, consultants, and others from

whom you solicit information and counsel. Tell them as little as possible about
your own ideas, estimates, and tentative
decisions. If you reveal too much, your
own preconceptions may simply come
back to you.
• Be particularly wary of anchors
in negotiations. Think through your
position before any negotiation begins
in order to avoid being anchored by the
other party’s initial proposal. At the
same time, look for opportunities to
use anchors to your own advantage—if
you’re the seller, for example, suggest a
high, but defensible, price as an opening
gambit.

The Status-Quo Trap
We all like to believe that we make
decisions rationally and objectively. But
the fact is, we all carry biases, and those
biases influence the choices we make.
Decision-makers display, for example, a
strong bias toward alternatives that perpetuate the status quo. On a broad scale,
we can see this tendency whenever a
radically new product is introduced.
The first automobiles, revealingly called
“horseless carriages,” looked very much
like the buggies they replaced. The first
“electronic newspapers” appearing on
the World Wide Web looked very much
like their print precursors.
On a more familiar level, you may
have succumbed to this bias in your
personal financial decisions. People
sometimes, for example, inherit shares
of stock that they would never have
bought themselves. Although it would
be a straightforward, inexpensive proposition to sell those shares and put the
money into a different investment, a

Idea in Brief
WHY IT MATTERS

Making business decisions is
your most crucial job—and your
riskiest. New-product development, mergers and acquisitions,
executive hirings—bad decisions
about any of these can ruin your
company and your career.
WHY IT HAPPENS

Where do bad decisions come
from? Mostly from distortions
and biases, a whole host of
mental flaws that sabotage
our reasoning. We all fall right
into these psychological traps
because they’re unconscious—
hardwired into the way we all
think.
WHAT TO DO

Though we can’t get rid of them,
we can learn to be alert to them
and to compensate for them—
monitoring our decision-making
so that our thinking traps don’t
cause judgment disasters.

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Fall 2023

51

AVOID PSYCHOLOGICAL TRAPS
THE HIDDEN TRAPS IN DECISION-MAKING

surprising number of people don’t sell.
They find the status quo comfortable,
and they avoid taking action that would
upset it. “Maybe I’ll rethink it later,”
they say. But “later” is usually never.
The source of the status-quo trap
lies deep within our psyches, in our
desire to protect our egos from damage.
Breaking from the status quo means
taking action, and when we take action,
we take responsibility, thus opening
ourselves to criticism and to regret.
Not surprisingly, we naturally look for
reasons to do nothing. Sticking with the
status quo represents, in most cases, the
safer course because it puts us at less
psychological risk.
Many experiments have shown the
magnetic attraction of the status quo.
In one, a group of people were randomly given one of two gifts of approximately the same value—half received
a mug, the other half a Swiss chocolate
bar. They were then told that they could
easily exchange the gift they received
for the other gift. While you might expect that about half would have wanted
to make the exchange, only one in 10
actually did. The status quo exerted its
power even though it had been arbitrarily established only minutes before.
Other experiments have shown that
the more choices you are given, the
more pull the status quo has. More people will, for instance, choose the status
quo when there are two alternatives to
it rather than one: A and B instead of
just A. Why? Choosing between A and B
requires additional effort; selecting the
status quo avoids that effort.
In business, where sins of commission (doing something) tend to be
punished much more severely than

52

HBR Special Issue
Fall 2023

sins of omission (doing nothing), the
status quo holds a particularly strong
attraction. Many mergers, for example, founder because the acquiring
company avoids taking swift action
to impose a new, more appropriate
management structure on the acquired
company. “Let’s not rock the boat right
now,” the typical reasoning goes. “Let’s
wait until the situation stabilizes.” But
as time passes, the existing structure
becomes more entrenched, and altering
it becomes harder, not easier. Having failed to seize the occasion when
change would have been expected,
management finds itself stuck with the
status quo.
What can you do about it? First
of all, remember that in any given
decision, maintaining the status quo
may indeed be the best choice, but you
don’t want to choose it just because it is
comfortable. Once you become aware of
the status-quo trap, you can use these
techniques to lessen its pull:
• Always remind yourself of your objectives and examine how they would be
served by the status quo. You may find
that elements of the current situation
act as barriers to your goals.
• Never think of the status quo as your
only alternative. Identify other options
and use them as counterbalances,
carefully evaluating all the pluses and
minuses.
• Ask yourself whether you would
choose the status-quo alternative if,
in fact, it weren’t the status quo.
• Avoid exaggerating the effort or
cost involved in switching from the
status quo.
• Remember that the desirability of
the status quo will change over time.

When comparing alternatives, always
evaluate them in terms of the future as
well as
the present.
• If you have several alternatives that
are superior to the status quo, don’t
default to the status quo just because
you’re having a hard time picking
the best alternative. Force yourself
to choose.

The Sunk-Cost Trap
Another of our deep-seated biases is to
make choices in a way that justifies past
choices, even when the past choices no
longer seem valid. Most of us have fallen
into this trap. We may have refused, for
example, to sell a stock or a mutual fund
at a loss, forgoing other, more attractive
investments. Or we may have poured
enormous effort into improving the
performance of an employee whom we
knew we shouldn’t have hired in the
first place. Our past decisions become
what economists term sunk costs—old
investments of time or money that are
now irrecoverable. We know, rationally,
that sunk costs are irrelevant to the
present decision, but nevertheless they
prey on our minds, leading us to make
inappropriate decisions.
Why can’t people free themselves
from past decisions? Frequently, it’s
because they are unwilling, consciously
or not, to admit to a mistake. Acknowledging a poor decision in one’s personal
life may be purely a private matter,
involving only one’s self-esteem, but
in business, a bad decision is often a
very public matter, inviting critical
comments from colleagues or bosses.
If you fire a poor performer whom you

Decision-makers display a strong bias toward
alternatives that perpetuate the status quo.

hired, you’re making a public admission
of poor judgment. It seems psychologically safer to let him or her stay on, even
though that choice only compounds
the error.
The sunk-cost bias shows up with
disturbing regularity in banking, where
it can have particularly dire consequences. When a borrower’s business
runs into trouble, a lender will often advance additional funds in hopes of providing the business with some breathing room to recover. If the business does
have a good chance of coming back,
that’s a wise investment. Otherwise, it’s
just throwing good money after bad.
One of us helped a major U.S. bank
recover after it made many bad loans to
foreign businesses. We found that the
bankers responsible for originating the
problem loans were far more likely to
advance additional funds—repeatedly,
in many cases—than were bankers who
took over the accounts after the original
loans were made. Too often, the original
bankers’ strategy—and loans—ended in
failure. Having been trapped by an escalation of commitment, they had tried,
consciously or unconsciously, to protect
their earlier, flawed decisions. They
had fallen victim to the sunk-cost bias.
The bank finally solved the problem by
instituting a policy requiring that a loan
be immediately reassigned to another
banker as soon as any problem arose.
The new banker was able to take a fresh,
unbiased look at the merit of offering
more funds.
Sometimes a corporate culture reinforces the sunk-cost trap. If the penalties for making a decision that leads
to an unfavorable outcome are overly
severe, managers will be motivated to

let failed projects drag on endlessly—
in the vain hope that they’ll somehow
be able to transform them into successes. Executives should recognize
that, in an uncertain world where
unforeseeable events are common, good
decisions can sometimes lead to bad
outcomes. By acknowledging that some
good ideas will end in failure, executives will encourage people to cut their
losses rather than let them mount.
What can you do about it? For all
decisions with a history, you will need
to make a conscious effort to set aside
any sunk costs—whether psychological
or economic—that will muddy your
thinking about the choice at hand. Try
these techniques:
• Seek out and listen carefully to the
views of people who were uninvolved
with the earlier decisions and who
are hence unlikely to be committed to
them.
• Examine why admitting to an earlier
mistake distresses you. If the problem
lies in your own wounded self-esteem,
deal with it head-on. Remind yourself
that even smart choices can have bad
consequences, through no fault of
the original decision-maker, and that
even the best and most experienced
managers are not immune to errors in
judgment. Remember the wise words of
Warren Buffett: “When you find yourself
in a hole, the best thing you can do is
stop digging.”
• Be on the lookout for the influence
of sunk-cost biases in the decisions and
recommendations made by your subordinates. Reassign responsibilities when
necessary.
• Don’t cultivate a failure-fearing culture that leads employees to

perpetuate their mistakes. In rewarding
people, look at the quality of their decision-making (taking into account what
was known at the time their decisions
were made), not just the quality of the
outcomes.

The ConfirmingEvidence Trap
Imagine that you’re the president of
a successful midsize U.S. manufacturer considering whether to call off a
planned plant expansion. For a while
you’ve been concerned that your
company won’t be able to sustain the
rapid pace of growth of its exports. You
fear that the value of the U.S. dollar will
strengthen in coming months, making
your goods more costly for overseas
consumers and dampening demand.
But before you put the brakes on the
plant expansion, you decide to call up
an acquaintance, the chief executive
of a similar company that recently
mothballed a new factory, to check
her reasoning. She presents a strong
case that other currencies are about to
weaken significantly against the dollar.
What do you do?
You’d better not let that conversation
be the clincher, because you’ve probably just fallen victim to the confirmingevidence bias. This bias leads us to
seek out information that supports our
existing instinct or point of view while
avoiding information that contradicts
it. What, after all, did you expect your
acquaintance to give, other than a
strong argument in favor of her own
decision? The confirming-evidence
bias not only affects where we go to
collect evidence but also how we

HBR Special Issue
Fall 2023

53

We tend to subconsciously decide what to do
before figuring out why we want to do it.

interpret the evidence we do receive,
leading us to give too much weight to
supporting information and too little
to conflicting information.
In one psychological study of this
phenomenon, two groups—one opposed to and one supporting capital
punishment—each read two reports
of carefully conducted research on
the effectiveness of the death penalty
as a deterrent to crime. One report
concluded that the death penalty was
effective; the other concluded it was
not. Despite being exposed to solid scientific information supporting counterarguments, the members of both
groups became even more convinced of
the validity of their own position after
reading both reports. They automatically accepted the supporting information and dismissed the conflicting
information.
There are two fundamental psychological forces at work here. The first is
our tendency to subconsciously decide
what we want to do before we figure
out why we want to do it. The second
is our inclination to be more engaged
by things we like than by things we
dislike—a tendency well-documented
even in babies. Naturally, then, we are
drawn to information that supports our
subconscious leanings.
What can you do about it? It’s not
that you shouldn’t make the choice
you’re subconsciously drawn to. It’s just
that you want to be sure it’s the smart
choice. You need to put it to the test.
Here’s how:
• Always check to see whether you are
examining all the evidence with equal
rigor. Avoid the tendency to accept confirming evidence without question.

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HBR Special Issue
Fall 2023

• Get someone you respect to play
devil’s advocate, to argue against the
decision you’re contemplating. Better
yet, build the counterarguments yourself. What’s the strongest reason to do
something else? The second strongest
reason? The third? Consider the position
with an open mind.
• Be honest with yourself about your
motives. Are you really gathering information to help you make a smart choice,
or are you just looking for evidence confirming what you think you’d like to do?
• In seeking the advice of others, don’t
ask leading questions that invite confirming evidence. And if you find that
an adviser always seems to support your
point of view, find a new adviser. Don’t
surround yourself with yes-men.

The Framing Trap
The first step in making a decision is
to frame the question. It’s also one of
the most dangerous steps. The way a
problem is framed can profoundly influence the choices you make. In a case
involving automobile insurance, for
example, framing made a $200 million
difference. To reduce insurance costs,
two neighboring states, New Jersey and
Pennsylvania, made similar changes in
their laws. Each state gave drivers a new
option: By accepting a limited right to
sue, they could lower their premiums.
But the two states framed the choice in
very different ways: In New Jersey, you
automatically got the limited right to
sue unless you specified otherwise; in
Pennsylvania, you got the full right to
sue unless you specified otherwise. The
different frames established different
status quos, and, not surprisingly, most

consumers defaulted to the status
quo. As a result, in New Jersey about
80% of drivers chose the limited right
to sue, but in Pennsylvania only 25%
chose it. Because of the way it framed
the choice, Pennsylvania failed to gain
approximately $200 million in expected
insurance and litigation savings.
The framing trap can take many
forms, and as the insurance example
shows, it is often closely related to other
psychological traps. A frame can establish the status quo or introduce an anchor. It can highlight sunk costs or lead
you toward confirming evidence. Decision researchers have documented two
types of frames that distort decisionmaking with particular frequency:

Frames as gains versus losses.
In a study patterned after a classic experiment by decision researchers Daniel
Kahneman and Amos Tversky, one of us
posed the following problem to a group
of insurance professionals:
You are a marine property adjuster
charged with minimizing the loss of
cargo on three insured barges that
sank yesterday off the coast of Alaska.
Each barge holds $200,000 worth of
cargo, which will be lost if not salvaged
within 72 hours. The owner of a local
marine-salvage company gives you two
options, both of which will cost the same:
Plan A. This plan will save the
cargo of one of the three barges, worth
$200,000.
Plan B. This plan has a one-third
probability of saving the cargo on all
three barges, worth $600,000, but has a
two-thirds probability of saving nothing.
Which plan would you choose?
If you are like 71% of the respondents in the study, you chose the “less

AVOID PSYCHOLOGICAL TRAPS
THE HIDDEN TRAPS IN DECISION-MAKING

risky” Plan A, which will save one barge
for sure. Another group in the study,
however, was asked to choose between
alternatives C and D:
Plan C. This plan will result in the
loss of two of the three cargoes, worth
$400,000.
Plan D. This plan has a two-thirds
probability of resulting in the loss of all
three cargoes and the entire $600,000
but has a one-third probability of losing
no cargo.
Faced with this choice, 80% of these
respondents preferred Plan D.
The pairs of alternatives are, of
course, precisely equivalent—Plan A
is the same as Plan C, and Plan B is
the same as Plan D—they’ve just been
framed in different ways. The strikingly
different responses reveal that people
are risk averse when a problem is posed
in terms of gains (barges saved) but risk
seeking when a problem is posed in
terms of avoiding losses (barges lost).
Furthermore, they tend to adopt the
frame as it is presented to them rather
than restating the problem in their
own way.

Framing with different reference
points. The same problem can also
elicit very different responses when
frames use different reference points.
Let’s say you have $2,000 in your checking account and you are asked the
following question:
Would you accept a 50/50 chance
of either losing $300 or winning $500?
Would you accept the chance? What
if you were asked this question:
Would you prefer to keep your checking account balance of $2,000 or to
accept a 50/50 chance of having either
$1,700 or $2,500 in your account?

Once again, the two questions pose
the same problem. While your answers
to both questions should, rationally
speaking, be the same, studies have
shown that many people would refuse
the 50/50 chance in the first question
but accept it in the second. Their
different reactions result from the
different reference points presented in
the two frames. The first frame, with
its reference point of zero, emphasizes
incremental gains and losses, and the
thought of losing triggers a conservative
response in many people’s minds. The
second frame, with its reference point
of $2,000, puts things into perspective
by emphasizing the real financial impact of the decision.

What can you do about it?
A poorly framed problem can undermine even the best-considered decision. But any adverse effect of framing
can be limited by taking the following
precautions:
• Don’t automatically accept the initial
frame, whether it was formulated by
you or by someone else. Always try to
reframe the problem in various ways.
Look for distortions caused by the
frames.
• Try posing problems in a neutral,
redundant way that combines gains and
losses or embraces different reference
points. For example: Would you accept
a 50/50 chance of either losing $300,
resulting in a bank balance of $1,700,
or winning $500, resulting in a bank
balance of $2,500?
• Think hard throughout your
decision-making process about the
framing of the problem. At points
throughout the process, particularly
near the end, ask yourself how your

thinking might change if the framing
changed.
• When others recommend decisions,
examine the way they framed the
problem. Challenge them with different
frames.

The Estimating and
Forecasting Traps
Most of us are adept at making estimates about time, distance, weight, and
volume. That’s because we’re constantly making judgments about these
variables and getting quick feedback
about the accuracy of those judgments.
Through daily practice, our minds
become finely calibrated.
Making estimates or forecasts about
uncertain events, however, is a different
matter. While managers continually
make such estimates and forecasts, they
rarely get clear feedback about their
accuracy. If you judge, for example, that
the likelihood of the price of oil falling
to less than $15 a barrel one year hence
is about 40% and the price does indeed
fall to that level, you can’t tell whether
you were right or wrong about the
probability you estimated. The only way
to gauge your accuracy would be to keep
track of many, many similar judgments
to see if, after the fact, the events you
thought had a 40% chance of occurring
actually did occur 40% of the time. That
would require a great deal of data, carefully tracked over a long period of time.
Weather forecasters and bookmakers
have the opportunities and incentives
to maintain such records, but the rest
of us don’t. As a result, our minds never
become calibrated for making estimates
in the face of uncertainty.

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Fall 2023

55

AVOID PSYCHOLOGICAL TRAPS
THE HIDDEN TRAPS IN DECISION-MAKING

All of the traps we’ve discussed so far
can influence the way we make decisions when confronted with uncertainty.
But there’s another set of traps that can
have a particularly distorting effect in
uncertain situations because they cloud
our ability to assess probabilities. Let’s
look at three of the most common of
these uncertainty traps:
The overconfidence trap. Even
though most of us are not very good
at making estimates or forecasts, we
actually tend to be overconfident about
our accuracy. That can lead to errors in
judgment and, in turn, bad decisions.
In one series of tests, people were asked
to forecast the next week’s closing value
for the Dow Jones Industrial Average.
To account for uncertainty, they were
then asked to estimate a range within
which the closing value would likely
fall. In picking the top number of the
range, they were asked to choose a high
estimate they thought had only a 1%
chance of being exceeded by the closing
value. Similarly, for the bottom end,
they were told to pick a low estimate for
which they thought there would be only
a 1% chance of the closing value falling
below it. If they were good at judging
their forecasting accuracy, you’d expect
the participants to be wrong only about
2% of the time. But hundreds of tests
have shown that the actual Dow Jones
averages fell outside the forecast ranges
20% to 30% of the time. Overly confident
about the accuracy of their predictions,
most people set too narrow a range of
possibilities.
Think of the implications for
business decisions, in which major
initiatives and investments often hinge
on ranges of estimates. If managers

56

HBR Special Issue
Fall 2023

underestimate the high end or overestimate the low end of a crucial variable,
they may miss attractive opportunities
or expose themselves to far greater
risk than they realize. Much money
has been wasted on ill-fated productdevelopment projects because managers did not accurately account for the
possibility of market failure.
The prudence trap. Another trap
for forecasters takes the form of overcautiousness, or prudence. When faced
with high-stakes decisions, we tend to
adjust our estimates or forecasts “just
to be on the safe side.” Many years ago,
for example, one of the Big Three U.S.
automakers was deciding how many of
a new-model car to produce in anticipation of its busiest sales season. The
market-planning department, responsible for the decision, asked other
departments to supply forecasts of key
variables such as anticipated sales,
dealer inventories, competitor actions,
and costs. Knowing the purpose of the
estimates, each department slanted
its forecast to favor building more
cars—“just to be safe.” But the market
planners took the numbers at face value
and then made their own “just to be
safe” adjustments. Not surprisingly, the
number of cars produced far exceeded
demand, and the company took six
months to sell off the surplus, resorting
in the end to promotional pricing.
Policy makers have gone so far as to
codify overcautiousness in formal decision procedures. An extreme example
is the methodology of “worst-case analysis,” which was once popular in the
design of weapons systems and is still
used in certain engineering and regulatory settings. Using this approach,

engineers designed weapons to operate
under the worst possible combination
of circumstances, even though the odds
of those circumstances actually coming
to pass were infinitesimal. Worst-case
analysis added enormous costs with
no practical benefit (in fact, it often
backfired by touching off an arms race),
proving that too much prudence can
sometimes be as dangerous as too little.
The recallability trap. Even if we
are neither overly confident nor unduly
prudent, we can still fall into a trap
when making estimates or forecasts.
Because we frequently base our predictions about future events on our
memory of past events, we can be overly
influenced by dramatic events—those
that leave a strong impression on our
memory. We all, for example, exaggerate
the probability of rare but catastrophic
occurrences such as plane crashes
because they get disproportionate
attention in the media. A dramatic or
traumatic event in your own life can
also distort your thinking. You will
assign a higher probability to traffic
accidents if you have passed one on
the way to work, and you will assign
a higher chance of someday dying of
cancer yourself if a close friend has
died of the disease.
In fact, anything that distorts your
ability to recall events in a balanced
way will distort your probability assessments. In one experiment, lists of
well-known men and women were
read to different groups of people.
Unbeknownst to the subjects, each
list had an equal number of men and
women, but on some lists the men
were more famous than the women
while on others the women were

A dramatic or traumatic event in your
own life can also distort your thinking.

more famous. Afterward, the participants were asked to estimate the
percentages of men and women on each
list. Those who had heard the list with
the more famous men thought there
were more men on the list, while those
who had heard the one with the more
famous women thought there were
more women.
Corporate lawyers often get caught
in the recallability trap when defending
liability suits. Their decisions about
whether to settle a claim or take it to
court usually hinge on their assessments of the possible outcomes of a
trial. Because the media tend to aggressively publicize massive damage awards
(while ignoring other, far more common
trial outcomes), lawyers can overestimate the probability of a large award for
the plaintiff. As a result, they offer larger
settlements than are actually warranted.

What can you do about it?
The best way to avoid the estimating
and forecasting traps is to take a very
disciplined approach to making forecasts and judging probabilities. For
each of the three traps, some additional
precautions can be taken:
• To reduce the effects of overconfidence in making estimates, always
start by considering the extremes, the
low and high ends of the possible range
of values. This will help you avoid
being anchored by an initial estimate.
Then challenge your estimates of the
extremes. Try to imagine circumstances
where the actual figure would fall below
your low or above your high, and adjust
your range accordingly. Challenge the
estimates of your subordinates and advisers in a similar fashion. They’re also
susceptible to overconfidence.

• To avoid the prudence trap, always
state your estimates honestly and
explain to anyone who will be using
them that they have not been adjusted.
Emphasize the need for honest input
to anyone who will be supplying you
with estimates. Test estimates over a
reasonable range to assess their impact.
Take a second look at the more sensitive
estimates.
• To minimize the distortion caused
by variations in recallability, carefully
examine all your assumptions to ensure
they’re not unduly influenced by your
memory. Get actual statistics whenever possible. Try not to be guided by
impressions.

Forewarned Is Forearmed
When it comes to business decisions,
there’s rarely such a thing as a nobrainer. Our brains are always at work,
sometimes, unfortunately, in ways that
hinder rather than help us. At every
stage of the decision-making process,
misperceptions, biases, and other tricks
of the mind can influence the choices
we make. Highly complex and important decisions are the most prone to
distortion because they tend to involve
the most assumptions, the most estimates, and the most inputs from the
most people. The higher the stakes,
the higher the risk of being caught in
a psychological trap.
The traps we’ve reviewed can all work
in isolation. But, even more dangerous,
they can work in concert, amplifying
one another. A dramatic first impression might anchor our thinking, and
then we might selectively seek out confirming evidence to justify our initial

inclination. We make a hasty decision,
and that decision establishes a new
status quo. As our sunk costs mount,
we become trapped, unable to find a
propitious time to seek out a new and
possibly better course. The psychological miscues cascade, making it harder
and harder to choose wisely.
As we said at the outset, the best
protection against all psychological
traps—in isolation or in combination—
is awareness. Forewarned is forearmed.
Even if you can’t eradicate the distortions ingrained into the way your mind
works, you can build tests and disciplines into your decision-making process that can uncover errors in thinking
before they become errors in judgment.
And taking action to understand and
avoid psychological traps can have the
added benefit of increasing your confidence in the choices you make.
HBR Reprint R0601K

John S. Hammond was a consultant on
decision-making and a former professor
at Harvard Business School in Boston.
Ralph L. Keeney is a consultant in
San Francisco and a research professor
emeritus at Duke University’s Fuqua School
of Business in Durham, North Carolina.
He is also the author of Give Yourself
a Nudge: Helping Smart People Make
Smarter Personal and Business Decisions
(Cambridge University Press, 2020).
Howard Raiffa was the Frank Plumpton
Ramsey Professor of Managerial Economics
(Emeritus) at Harvard Business School.
They are the authors of Smart Choices: A
Practical Guide to Making Better Decisions
(Harvard Business Press, 1998).

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Fall 2023

57

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